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Invest With An Edge

What is Investment Management?

Brian Campos and Ron Rowland contributed to this article.

Far too often, we as investors seek market commentary, opinions, forecasts, strategies, trading ideas, and hot tips. We often overlook the bigger picture, and more important aspect of investing – investment management. Investment management, also known as portfolio management, is the professional management of various securities and assets, to meet specified investment goals for investors. Investors can be institutions like banks, pension funds, or insurance companies. They can also be private investors like Michael Dell, Oprah Winfrey, or you. As the various investment markets continue to offer investors choppy waters, more and more folks are exploring the idea of investment management. Perhaps you’re interested in professional investment management and if that’s the case, here are some things to consider.

Investment management is both an art and a science. It’s an art in the sense that professional investment managers are responsible for securing portfolio return against the backdrop of an often unpredictable and illogical marketplace influenced by the visceral responses of emotional investors. Just as importantly, investment management is the science of controlling and mitigating risk while seeking to optimize portfolio returns. There should always be a process to managing money, and a credible investment manager will always have a stringent investment philosophy with a disciplined and consistent process for evaluating risk. The most successful investment managers will balance both risk and return, not trading one for the other. According to Aswath Damodaran of the Stern Business School at NYU, an investment management process includes six different aspects. They include:

1) The Big Picture of Investment Management: Before considering whether you need professional investment management, you should understand the nature of the business. You don’t have to be an expert, but it’s good to know the natures of risk, return, the market, trading costs, time horizons, and so forth.

2) Client Goals: Different clients have different needs. A 30-year old who just inherited a million dollars will have different goals from a 60-year old with a million dollar nest egg. The time horizon for retirement is much longer for the 30-year old compared to the 60-year old. A clear understanding of tolerance to various risks is mandatory. Good investment managers always consider their client’s investment goals paramount.

3) Asset Allocation: Contrary to popular opinion, the stock market is not the only market in investment management. There are both international and domestic stocks, bonds, real estate, commodities, precious metals, cash equivalents, and other assets. Asset allocation refers to the unique mix of different investments that managers use to construct portfolios. Some managers rely strictly on longer term “strategic” asset allocation, while others may employ shorter-term “tactical” shifts in an attempt to reduce risk.

4) Security Selection: After choosing the appropriate assets to invest in, investment managers then choose what they determine to be the best securities for those assets. For instance, if managers determine that US large cap stocks will match the client’s goals, they may choose to buy shares in the S&P Deposit Receipts ETF (SPY). You want an investment manager with good understanding of the different securities available. It is important to address individual security risk at this stage.

5) Execution: Execution refers to the buying, holding, and selling of different investment securities. There are nuances of each market and pitfalls that chip away at returns. That’s why it’s important to use an investment manager who can navigate the sometimes-treacherous waters of the market.

6) Performance Evaluation: After you have been with an investment manager for awhile, it’s good to review their performance. Have they met the investment objectives that you agreed to when you signed up? Keep in mind, it’s not just about returns, but the risk and volatility associated with that performance. This is best looked at over a full market cycle, which is often several years. Is the portfolio a reflection of the type of vehicle needed to get you to your goal? If not, it may be time to reconsider your relationship.

At first glance, it appears the six aspects outlined above are missing an important element – risk management. However, if you look closer, you will find that risk management is an integral part of every aspect rather than being a stand-alone section. It is so important that it should be addressed at every step.

This overview should serve to introduce the concept of investment management and some things to look for when evaluating it. All six of these aspects work in relation to controlling the risk in an investor’s porfolio while seeking an optimal return that is appropriate for one’s goals. If you are currently interested in finding out more about investment management, a great place to start is with our affiliate Capital Cities Asset Management. You can contact them at (800) 767-2595 to discuss your needs or to schedule a free investment consultation.

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